By now we all know that in California, proper estate planning is essential to ensure that your property passes to your heirs as painlessly and effortlessly as possible. The majority of estate planning today involves establishing a revocable trust and pour-over will. The trust is a truly magical legal device. And when properly funded, a trust allows your heirs to manage your property when you pass away while avoiding the expensive, time consuming, and tedious California probate process. However, more and more often we are seeing that this careful estate planning can be undone or substantially frustrated by failing to properly fund your trust.
Establishing the trust is just the first step toward achieving your goals. To make a trust truly effective, you must fund the trust. Funding the trust consists of making sure that title to all your non-qualified assets are transferred into the name of the trust instead of remaining in your name as an individual or a couple. Funding does not happen automatically when you establish your trust. For real property, a deed must be recorded with the county recorder. Some estate planning attorneys will handle the mechanics of funding the trust for their clients but most do not.
The most common scenario that we encounter in the unfunded trust context is where parents own a home. For example, parents establish a trust with their daughter as successor trustee, but for some reason title to the house does not get transferred to the trust. The parents pass away and daughter tries to sell the house but, unfortunately, because the house is still in the name of her parents, daughter, as successor trustee of the trust, does not have authority over the house because the trust is not the owner of the house.
Historically, the daughter would be left with no option but to open a probate and obtain letters of administration to transfer title to the house. In 1993, however, the California Court of Appeal gave us an alternate option that provides a quicker and more cost effective solution than a petition for probate.
The Estate of Heggstad
In 1993, a similar set of circumstances reached the California Court of Appeal in the case of Estate of Heggstad (1993) 16 Cal. App. 4th 943. Mr. Heggstad owned about 35% interest in a parcel of real property in Menlo Park, California. He established a valid revocable living trust naming himself as trustee and his son as successor trustee. Mr. Heggstad owned several other parcels of real property and executed grant deeds transferring each of these properties to his trust but failed to transfer the Menlo Park property to his trust. All the real properties, including Menlo Park, were individually described on a schedule to the trust, which was attached to the Heggstad trust.
Not knowing how to administer the Menlo Park property, Mr. Heggstad's son filed a petition for instructions with the California Superior Court. In his petition, Mr. Heggstad's son argued that the language of the trust alone was sufficient to create a trust with regard to the Menlo Park property and that a separate grant deed was not required. The trial court agreed.
In the appeal, the Heggstad Court affirmed the trial court's decision holding that "a written declaration of trust by the owner of real property, in which he names himself as trustee, is sufficient to create a trust in that property, and the law does not require a separate deed transferring the property to the trust."
Estate of Heggstad (1993) 16 Cal. App. 4th943, 950. In reaching this conclusion, the
Heggstad Court cited two recognized methods for creating a trust "(a) A declaration by the owner of property that the owner holds the property as trustee," and "(b) A transfer of property by the owner during the owner's lifetime to another as trustee."
Id at 948 (citing Probate Code §15200). The Court reasoned that Mr. Heggstad executed the written trust document declaring himself as trustee of all the property described on the trust schedule, including the Menlo Park property, and that this act "constitutes a proper manifestation of his intent to create a trust."
Id. At 948. As a result, the
Heggstad Court ordered the Menlo Park property be transferred to the trust.
The California legislature officially codified the authority to bring a Heggstad petition in Probate Code §850(a)(3)(B) which authorizes a trustee to bring a petition "where the Trustee has a claim to real or personal property…" Since 1993, petitioners have successfully relied on §850 and Heggstad to argue for post death transfers of property from a decedent's estate to their trust, thus avoiding a formal probate petition.
Heggstad provides a possible solution in cases where a settlor's trust includes a detailed schedule of trust assets but still requires the trustee to rely on the probate courts to effect the transfer. However, many estate plans prepared today do not describe each item of property on an attached schedule or otherwise. Instead, the trust will provide a general assignment of "all real or personal property." In this case,
Heggstad likely does not provide a solution.
Ukkestad v. RBS Asset Finance
Fortunately, just last year, the California Court of Appeal provided an answer in the case of Ukkestad v. RBS Asset Finance (2015) 235 Cal. App. 4th 156. In
Ukkestad, the settlor, Mr. Mabee, established a trust appointing himself as trustee. Mr. Mabee, like Mr. Heggstad, failed to transfer two parcels of real property to his trust. However, Mr. Mabee's trust did not provide any specific information about the property. Instead, it only provided a general assignment which stated "Grantor…hereby assigns, grants and conveys to the Trustees of this instrument all of the Grantor's right, title and interest in and to all of his real and personal property."
Ukkestad at 159.
The issue in Ukkestad was whether this type of general assignment is sufficient to satisfy the statute of frauds as codified in Probate Code §15206 which provides that "A trust in relation to real property is not valid unless evidenced…(a) By a written instrument signed by the trustee…(b) By written instrument conveying the trust property signed by the settlor…(c) By operation of law." The
Heggstad Court analyzed the same issue and determined that the statute of frauds is satisfied when the owner of real property executes a written trust naming himself as trustee.
The Ukkestad Court reasoned the statement in the trust "all of his real and personal property," did in fact identify which property of the settlor was included. Furthermore, the full identification of the property could be ascertained by reference to the real property records. As such, the Court held that where a settlor makes a general assignment of all real property to his trust and the real property description can be made certain from publicly available documents, the general assignment is sufficient to comply with the statute of frauds.
Ukkestad at 163-64.
Now, thanks to Probate Code §850 and the authority in Heggstad and
Ukkestad, as long as a trust is properly executed and provides a general assignment of all settlors real and personal property to the trust, it is likely that a post-death
Heggstad petition will successfully save an unfunded trust, therefore allowing the heirs to avoid opening a full formal probate.
Obviously, the Heggstad petition is merely a backup plan and is not a replacement for proper estate planning. If you have any concerns about whether your trust is properly funded, you should contact us to discuss as soon as possible.